Lack of incentives hamper foreign investment to Finland
Finland ranks 20th out of the 27 EU countries in foreign investment. The culprits? High taxes, homogeneity, cold dark weather, and low-tax Estonia. It’s all here in Financial Times’ “Foreign investment: Lack of incentives hampers FDI flow“…
Led by companies from Sweden, Germany, the UK and US, sectors such as banking and services have been transformed by the foreign investment.
But appearances may be deceptive. Matched against its peers, Finland’s performance in attracting foreign direct investment has been relatively disappointing – much to the frustration of officials – and presents a significant challenge for the new government.
“The paradox is that our competitiveness is good and still we lag behind [in FDI],†says Risto Paaermaa, deputy director-general of the ministry of trade’s industries department.
Between 2003-2005 the country’s stock of foreign direct investment was an average 29 per cent of gross domestic product, according to the Organisation for Economic Co-operation and Development (OECD).
This puts it well in the bottom half of the rankings that are headed by Ireland – another small country on the fringes of the European Union that has developed a dynamic and open economy. Among the 27 EU countries, Finland ranked 20th in 2005.
Even Tuomo Airaksinen, head of Invest in Finland, whose job it is to attract investment, acknowledges that while the world has seen strong growth in FDI in recent years “we have not participated in thatâ€Â.
[...]The reasons for Finland’s relatively sluggish FDI performance are manifold.
In business circles high rates of personal tax are commonly cited as a problem. Most analysts agree that the things that make up Finland’s potential attractiveness to investors – size, location and homogenous society – are also part of the problem when it comes to attracting FDI.
With a population of just over 5m, Finland boasts one of the more nimble and well-regulated economies of Europe that has been able to successfully exploit the advantage of being part of a bigger single market and currency union. That has boosted the opportunities for Finnish business. But in terms of the attractiveness of Finland itself, it remains a small part of bigger whole.
The homogeneity of Finnish society contributes to its stability, but can also make integration difficult.
“Doing business here is no problem, but for the families – it is not always easy for families,†acknowledges Mr Airaksinen.
Geography is also a drawback. While proximity to Russia and the much smaller Baltic markets has certain advantages, the fact remains that Finland is still located on Europe’s fringes.
One Helsinki banker asks: “Why would anyone invest here?†He says: “Yes, this country has functioning infrastructure. But there might be better places to base your company than close to the Arctic Circle.â€Â
The proximity of countries, such as Estonia, that offer markedly lower taxes and labour costs has further eroded Finland’s ability to compete. The growth and development of Russia poses a further competitive threat for the future.
With taxation the problem lies with income tax. Corporate tax rates of 26 per cent are quite competitive.
Top-end personal tax rates of close to 50 per cent are less so. “This is a heavily taxed country – it’s not easy to attract foreigners here because of high personal taxes,†says Henrik Andersin, chairman of Evli Bank, an investment bank.




